Insurance and Replacement Cost

One of our clients suffered a total loss after a fire in their home. The fire began in their garage and swept through their 1980s era ranch. What the fire did not destroy, water used to douse the flames ruined. Even the foundation was damaged.

As the reconstruction of their home was planned, the client discovered that rebuilding the home with modern materials would actually cost more than the original value of the home. Would rebuilding the home be covered with the insurance settlement, or would they have to budget for a new mortgage?

Our client asked a smart question. Material and labor costs can fluctuate. During a housing boom, the cost of lumber, plywood and other materials can go up as demand for these materials inflate. Hiring skilled labor during busy times can drive up costs as well. It is not unusual for the cost of replacing a home to jump up well beyond the home’s appraised value. Housing codes change as well, and what is allowed today may cost more than was allowed in the past.

Most mortgage companies require you carry enough insurance to at least cover what is owed on the property. A good agent will encourage their clients to carry enough insurance to cover replacement costs. That said, there are at least two ways replacement costs can be insured, and the type of coverage you choose will guide how you manage your insurance.

Guarantee Replacement Cost – This kind of coverage will insure the home against loss so as to completely replace what was destroyed. In the event of a loss, and less the deductible, total construction and material costs will be paid, regardless of the dwelling limit on policy. This is the ideal coverage. The total rebuilding costs of a home appraised at $250,000 would be covered by the insurer no matter how much the costs exceeded the apraised value.

Extended Replacement Cost – With coverage of this nature, the insurance company will cover a percentage of reconstruction costs above the value of the home. Typically, this percentage is in the range of 20-30%. Rebuilding costs for a home that appraised at $250,000 would be covered up to $300,000 to $325,000.

Many insurance companies are no longer offering full replacement cost policies in favor of extended coverage policies.

For homeowners, this change in how policies are structured means they should have regular reviews of the value of their home and the cost or reconstruction in their market. If reconstruction costs have risen, the homeowner and their agent should adjust their coverage to make sure that their likely replacement cost falls safely within their coverage.

Those who are insured for full replacement cost have less to consider from year to year as their home. Budget conscious homeowners may save money on premiums by switching to an extended coverage policy.

The independent agents of O’Connor Insurance Company can help you identify possible gaps in your coverage. If you would like to review your coverage, contact us and we will be happy to help.

Please contact one of our independent insurance agents at 314-434-0038.